Labor pooling in R&D intensive industries

We investigate the interplay between firms' R&D decisions and local labor market competition and how this influences equilibrium location choices and welfare. Firms engage in risky R&D activities that generate stochastic product and derived labor demand. We show that firms located in a cluster tend to invest more and take more risk in R&D compared to spatially separated firms. Most interestingly, ex-ante symmetric firms choose asymmetric R&D investments when located in a cluster. This creates an additional welfare benefit from agglomeration, because firms choose a more efficient, diversified portfolio of R&D projects at the industry level.